Global shipping prices are on a tear

Earlier this year, the world was wondering if some major
economies were on the verge of tipping into sustained deflation,
which can be a a damaging self-perpetuating cycle in which people
stop spending as they bet prices will continue to fall.

In recent
weeks, there have been signs of a surge
in the Baltic Dry index, a measure of rates for
use of the giant cargo ships – known variously as Capesize,
Supramax and Panamax carriers – that ferry commodities around on
global trade routes. The index is provided by the Baltic Shipping
exchange.

Well, a week on the rally on the index has not only continued,
but accelerated.

Overnight the index rose by a further 5% to 829, the highest
level seen since December 16 last year. Not only does the index
sit at its 2015 high, it’s risen 62.9% from the all-time low of
509 struck on February 18.

The chart below tells the story from this year. (There’s some
important context to this, which we’ll get to.)

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In a website post, Peter Sand, chief shipping
analyst at BIMCO, the world’s largest international shipping
association, suggests the gain is dues to two factors: a rebound
in the spot iron ore price and reduced supply of Capesize
vessels.

“We have seen the BDI constantly go higher since end-May.
Chinese iron ore fixtures has been on a slow but rising trend
throughout the year, so what we are seeing now has been long
coming.

But this is not all about the demand side, the lift would not
have been possible without the support coming from a decreasing
Capesize fleet size. Since we entered into 2015 the Capesize
fleet is now short of 22 ships equal to a drop in capacity of
0.7%.

The BDI is lifted on the back of stronger Capesize earnings
which has more than doubled during the month of June. Panamax
earnings also improved significantly since late May”.

The chart below, supplied by BIMCO, shows the surge in freight
rates for larger Capesize vessels in recent months.

BIMCO, Clarksons

While the
recent rally is sharp, it does need to be put in context. Here’s
the Baltic Dry index chart over the past 30 years.

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Australia

From its peak
of 11793 on May 20, 2008, a time when commodity prices were
surging in response to increasing demand from China, freight
rates fell by 93% as lower commodity prices, an oversupply of
vessels and slower demand from China worked in tandem to send
freight costs to an all-time contract low.

So while the index is 62.9% above its all-time low, the recovery
stems from an incredibly low base.

At the same time, however, the rising prices are a sign of
increased demand for transport of goods around the world, and
it’s not just confined to the Capesize category, which is being
affected by a shortage of cargo ships.